Two big things happened to Amazon.com, reportedly the Internet's most successful bookseller, in October of 1997. It became the first recorded electronic commerce site to serve a million customers, and it signed an agreement to become the "exclusive" bookseller on Netscape Netcenter's new emmerce section, Marketplace.
Netscape Marketplace, a co-branded storefront, is Netscape's long-anticipated move into the growing emmerce business. With Marketplace, rather than just selling software and expertise, Netscape will directly participate in selling products online, either as a vendor, a franchiser, or a virtual landlord. Under an exclusive agreement, Amazon.com has an "above-the-fold" button on Netscape's popular NetSearch page. That provides even easier access to Amazon's 2.5 million-plus titles for the reported 67 percent of Windows-based Web searchers who currently use Netscape. In addition, Amazon will be bookmarked in future releases of Netscape client software and receive prominent marketing and advertising within Netcenter. In return, Amazon will feature book titles and editorial content targeted to Netscape Netcenter's audience. This is another big step forward into the world of true emmerce for Amazon.
Just two years ago, Amazon.com founder and CEO Jeff Bezos was wrapping book orders in his garage and delivering them to the post office in the family car. Now, he has customers in more than 160 countries and exclusive deals with nearly every major Internet site around -- among them AOL, Excite, the AltaVista Search Service, the Prodigy Shopping Network, and now Netscape. (Amazon has a deal with Yahoo! as well, but Yahoo!, the more experienced Internet entity in this deal, refused to make it exclusive.) Even given his amateur standing in the Internet world, Bezos' is an astonishing success story in the annals of corporate start-ups.
Amazon's press releases all stress this success and trumpet the same outstanding set of Internet features: a catalog of 2.5 million titles, "virtually unlimited" online shelf space (get it?), easy-to-use search and browse features, e-mail service, a personalized shopping service, Web-based credit card payments, direct shipping to customers, and an efficient search-and-retrieval interface. Most of the media coverage today slavishly echoes one or another of these points, and there can be no doubt that Amazon has emerged as an unqualified success in the emerging field of electronic commerce.
But exactly what kind of success is it? Is it successful because it was among the first companies to utilize the strengths of the Web well? Or because it started out in such a big way, with big ideas and a big budget to advertise? Is it Bezos' financial acumen? Or is it all those factors, combined with some major changes, even some deficiencies, in the traditional publishing industry? This column takes a look at all of that, as well as at some other Internet communities applying other electronic commerce models to the age-old trade of bookselling.
How to Make Stone Soup
A recent article in the prestigious Economist ["A River Runs Through It," May 10, 1997] calls Amazon.com "the cyberspace equivalent of the fairytale about stone soup, in which two men set up a big pot full of water over a fire in the town square, drop in a stone, and start stirring. The first curious passer-by asks what it is, and is told it will be a delicious stone soup; all it lacks is a few carrots. The passer-by fetches some carrots and drops them in. Other passers-by add potatoes, onions and so on until the soup really is delicious and is served to all. Amazon has set up the pot and dropped in the stone; the Internet's townsfolk are contributing most of what makes it perfect."
Amazon.com is certainly the most visible book-buying service on the Web, thanks to its many "exclusive" bookselling agreements. But its claim to be the "Earth's Biggest Bookstore" is questionable. They've even been taken to court over it -- by their fiercest competitor, Barnes and Noble. Strictly speaking, Amazon.com isn't a bookstore at all, but an online access and ordering system with a huge backlist and customer service and delivery arms. But the arguments that rage in the press and the listservs over whether Amazon.com is the biggest or simply the most visible bookseller are not nearly as important as the real question: Is Amazon.com a profitable, viable electronic commerce venture, and therefore a good model for others interested in entering the field?
The answer to the question "Is it profitable?" is a resounding "NO." As of this writing, gross revenues had climbed dramatically, to $27.9 million in the second quarter of 1997; but in the first quarter of 1997, Amazon had reported revenues of $16 million, a little over its revenues of $15.7 million for all of 1996 -- and almost three times the figure for its nearest online competitor. The second quarter figures, while impressive, actually represent not only a slowing in growth, but a financial loss as well.
Profits have proved elusive from the start. After losing $30,000 (2 cents a share) in 1995 during its first year in business, Amazon lost $5.8 million (26 cents a share) in 1996 in spite of substantial increases in sales. And Amazon's cost of sales rose right along with revenues. In the second quarter of 1997, cost of sales amounted to 81.3 percent of total revenues, and operating expenses climbed to $12.3 million. Even though there was some reduction in product development and administrative expenses, Amazon's second quarter net loss in 1997 more than doubled, to $6.7 million.
Furthermore, it's hard to say when Amazon will become profitable. It continues to discount prices, even more deeply as its ongoing battle intensifies with publishing giant Barnes & Noble and their bookselling Web site, Barnes andnoble.com (the "World's Largest Online Bookseller," according to that home page). Both face some entrenched competition from Books.com (also known as Bookstacks Unlimited), which has run a Web site since 1992, as well as from a number of traditional bookstores that have begun to utilize the Web -- much as Amazon and Barnes & Noble do -- as an Internet finding and ordering mechanism.
Most traditional bookstores have access to the same major book distributors. The largest of them, Ingram Book Co., has its warehouses just outside of Seattle, reportedly Bezos' reason for headquartering Amazon there. Most traditionals also offer books …